JP Renne (University of Lausanne)

This lecture offers an extensive study of macro-founded asset pricing models which explicitly integrate the role of key macroeconomic variables (revenue growth, inflation and uncertainty). One of its main objectives is to shed light on the critical effects of macroeconomic risk structures on long run portfolio returns. The analysis will therefore target modelling approaches of the joint dynamics of macroeconomic factors and asset prices. It will focuses on the so-called affine models family – which include the long run risk models pioneered by Bansal and Yaron (2004), that solved popular asset pricing puzzles – equity risk premium puzzle and risk free rate puzzle. These tractable and flexible approaches open the route to valuation tools integrating consistently equilibrium asset prices and macroeconomic scenarios. The introduction of the lecture will review the literature investigating how macroeconomic variables affect asset returns. A first part will present the above mentioned affine pricing models. It will be shown how they help to understand the effects of macroeconomic changes on asset returns. As an illustration, we will present a method for generating asset price scenarios contingent to exogenous macroeconomic trajectories. A second and last part will carefully examine numerical resolution and calibration issues on real data.